Annuity, or the latest mini-MPV?

Our recent research, disclosed that a greater proportion of consumers spend more time choosing a new car than they do planning how they want to take their pension income.

Over 80% spend an hour or less a week actively managing their retirement finances, so it’s little wonder that only 53% of our respondents could accurately describe what an annuity is. And yet, we also know that financial security and a guaranteed income are by far the two most important factors for consumers in retirement. 

So, despite the valuable role annuity income can play for many people in retirement, a lack of understanding and misconceptions about how annuities work are still prevalent.

This confusion could mean that consumers are put off purchasing the product, because they don't believe it offers good value or provides the flexibility to allow them to leave their loved ones with an income, or their family with a legacy.

Enhanced annuity? No thanks

Our survey found that up to three quarters (76%) of over-55s are unaware that medical conditions or lifestyle factors such as smoking could actually increase the money they receive from an annuity. Thousands of retirees are potentially missing out on a higher pension income, by failing to disclose health issues because they don’t understand they may benefit from a higher income if they do.

The data revealed that many consumers tend to view the impact of disclosing medical conditions for annuities as similar to life insurance products. Almost one in ten (8%) thought ill health would actually reduce the amount of money they would receive in retirement, while another 18% thought it wouldn’t make any difference to their retirement income. Worryingly, a small group (5%) think that informing an annuity provider about a pre-existing condition would see their application rejected. 

Annuities are all the same

Over a quarter of our respondents had no idea what an annuity was, with 10.8% believing they were an investment product and nearly 8% believing an annuity to be an annual savings plan. Potentially, as a result of this lack of understanding, just 25% of already retired respondents said they had taken out an annuity. 

This confusion and a lack of awareness extend also to the different options available, including joint annuities, fixed term annuities, deferred annuities, value protection and instant-access annuities. 

Nearly half of the people we surveyed claim to have heard of an annuity as a way to use their pension savings, but only 34.5% had heard of a joint annuity and 26% heard of value protection. However, it’s not clear from the results whether our respondents understood the meaning of all these terms. In comparison, nearly 70% of respondents had heard of an ISA and over 50% of savings bonds.

In addition, because the less familiar features of annuities are misunderstood, they tend to be viewed as poor value or riskier products. For example, when asked which products would provide best value, joint annuities showed as reasonable value, but high risk. Deferred annuities and instant-access annuities were deemed to be low value and high risk.  

There’s a clear need for greater education and advice when it comes to retirement planning. The financial services industry has a vital role to play, and I firmly believe we can do a much better job by changing the way we engage with consumers, removing the jargon and explaining the options available in a clearer, more human way. Our research shows the majority of retirees want a financially secure retirement with a guaranteed income, and that’s exactly what an annuity provides. Lack of understanding about annuities and the options available is hampering retirees from choosing the right retirement income for them. And although annuities won’t be right for everyone, the least we can do is make sure consumers make their decisions based on a sound understanding of their options.
Emma Byron, Managing Director of Retail Retirement Income

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Things for you and your client to consider:

Pension annuities don’t have a ‘cash-in’ value and the total income paid from your client’s annuity could be less than the amount they used to buy it.

The amount of pension income we’ll offer your client will be based on our annuity rates at the time. If they buy when rates are low, their income will reflect this.

Price inflation can reduce the real value of your client’s income over time, which could mean that it doesn’t stretch as far in future years.

It's a once and for all decision. Once their annuity is in payment your client can't change any of their payment options, even if their circumstances change.

The pension income we offer your client will be based on the information they provide when they apply. If their health subsequently deteriorates, we won’t be able to increase their income.